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Background Documents

Rethinking Growth: The Need for a New Economics

byRoberto Peccei,UCLA andthe Club of Rome

For over 40 years the Club of Rome has been concerned with the sustainability of ourplanet. The conclusion of the famous first report to the Club of RomeLimits to Growththat the world was on an unsustainable path was anticipatory and prescient. AlthoughLimits

caused considerable debate, after an initial flurry of interest, the message of theClub of Rome was largely ignored. Only now is this message beginning to re-acquirethe currency it deserves, but we have lost much time.

Today many people aroundthe world understand that the “business as usual” pathmankind is on will lead to major ecological, social and economic challenges in thefuture. However, very few really understand what practical steps need to be taken toavoid this predicament. It has become clear that understanding the problems humanityfaces is not enough. One needs to find solutions and the will to implement them.

It is worthwhile reflecting on the reason why it is so difficult to find a solution to thepredicament that mankind findsitself in. The Club of Rome and other like-mindedorganizations have been very good at providing the deep understanding of the reasonfor this predicament, which are rooted in the growth of population and of consumption ina finite world. The Club of Rome,

as well as many other organizations and individuals,have also been very good at suggesting practical ways for moving towards sustainabilitythrough specific actions. In fact, the two most recent reports to the Club of Rome,Factor 5: Transforming the Global Economy Through 80% Improvements in ResourceProductivityby Ernst von Weizsaecker et al, andThe Blue Economy

by Gunter Paulisuggest many practical ways to make the world more sustainable by increasingefficiency and relying on bio-mimicry.

As IanJohnson, the Secretary General of the Club of Rome, has pointed out what hasbeen missing, on the whole, in the work of the Club of Rome and that of others, is thecrafting of the necessary legal and social instruments which help link the theoreticalunderstanding of the problem with practical actions, based on a thorough analysis andextensive policy debates. This raises the question of why it has been so difficult todevise these implementation mechanisms. In my view the reason is simple: it has beenimpossible to carry out this analytical and policy work using current economic theory,because the underlying principle of this theory is economic growth.

If one believes that the central issue facing us today is that unbridled population andeconomic growth is untenable in a finite world, one must then logically develop legaland social instruments which will provide solutions to our present predicamentoutside

of our present economic theory. Thus what is needed for progress to occur is a neweconomic theory–

one where sustainability rather than growth is the central driver.Such an economic theory does not really exist!

The world needs a paradigm shift in economics similar to the one physics experiencedat the dawn of the last century, when quantum mechanics and the special and generaltheories of relativity were invented to address new phenomena not explainable byNewtonian mechanics, or Maxwell’s electrodynamics.

I believe economics is ready for a similar paradigm shift. Modern economic theory wasconstructed on a foundation laid out by Adam Smith in his famous 1776 bookTheWealth of Nations.Although economics has evolved in the last 200 years, many of itsfundamental concepts derive from that time. This was a time of limited productioncapacity, at the dawn of the industrial revolution, where human capital was the maindriver and the production of manufactured goods was synonymous with wealth creation.Then the nation state was the basic unit and one of Smith’s tenets was that competitionamong nations led to economic advantage.

We live now in quite a different world-

one where services rather than manufacturingaccount for the bulk of the economic activity. Furthermore, the economy is now soglobalized that the notion of nation state economies has lost most of its meaning. Inaddition, financial transactions, rather than being the means for economic activity, havebecome an end in itself. Given these changed circumstances, it seems obvious to methat one might want to rethink the underlying economic theory.

However, in contrast to physics a century ago, there seem to be no sense of urgencyamong today’s economists to create a new economic theory to reflect better today’srealities. A century ago, Einstein, Planck, Bohr and many other brilliant youngphysicists working in relative obscurity modified Newtonian physics to account forphenomena not explained by classical theory. We urgently need their equivalents ineconomics to forge the new economics of the future, where natural capital is no longeranexternality and sustainability rather than growth is the key.

Gus Speth, a member of the Club of Rome and until recently the Dean of the School ofForestry at Yale University, described well what characteristics one wants this neweconomy to have. Let me quote what he said in his 2010 John H. Chaffee MemorialLecture to the Council for Science and the Environment in Washington D. C.

“We should be building what I would call a “sustaining economy”-

one that gives top,over-riding priority to sustaining both

human and natural communities. It must be aneconomy where the purpose is to sustain people and the planet, where social justiceand cohesion are prized, and where human communities, nature and democracy allflourish, its watchword is caring-caring for each other, for the natural world, and for thefuture. “

Constructing the new economics needed for a sustainable world will not be easy. Onemust be prepared to think boldly, clearly stating what are the goals sought and beingprepared to jettison old concepts. Let me briefly illustrate this with an example, relatedto the interconnection of unemployment and economic growth. One of the difficulties ofimagining an economy without growth is that, in classical economic theory,unemployment rises if there is no

economic growth. This connection between growthand employment is known as Okun’s law, which is named after the American economistArthur Okun who noted that there is an empirical relationship between growth in GDPand changes in unemployment. Percentagechanges in unemployment are negativelycorrelated with GDP growth. In the United States, for instance, unless GDP growsaround (2-3)% / year unemployment grows. Zero GDP growth causes unemployment togo up 2%.

In a new economics, one must decouple unemployment from growth. This is possible,but it requires radical new thinking. Let me quote in this connection from a paperentitledThe Wealth of Nations Revisited

by Orio Giarini and Ivo Slaus, both members ofthe Club of Rome, and their collaborators.

Talking about the new economics needed,these authors state

“That requires formulation of a new theory, not just modification of prevailing concepts.There is no reason why we should not formulate a theory of economics based on thepremise that all members of society have a right to employment, a theory that not onlyaffirms the right but also presents the structures and processes by which this can beachieved.”

In other words, in this new economics one must strive to put the welfare of humanbeings ahead of the

production of goods and services.

In principle, one can achieve astable employment rate even with no GDP growth, if one can unlink the percentage ofunemployment from the rate of growth of GDP. This may occur if one transitions to adifferent economy where there are more labor intensive sectors, as suggested recentlyby Tim Jackson and Peter Victor. It also can occur (at least in some sectors) in GunterPauli’s Blue Economy where one makes waste streams productive via bio-mimicry,effectively creating new jobs when before there were none.

An employment centric economics, in a world of little or no-growth, by necessity mustbe quite different than the present market based economics. Its natural time scale is theproductive life-span of human beings,rather than the quarterly reports that rule moderncorporations, not to speak of the millisecond transactions that now seem to dominatefinancial markets. On this human time scale, actions that incorporate the welfare offuture generations and the preservation of the environment become natural.

In any consideration of the future, attention should be closely paid to what economicframework will underpin the society of the future. In my view, to aspire at a world that issustainable, the economic thinking needs to radically change. Consumption can nolonger be synonymous with wealth. Consumption increases current well-being at theexpense of future well-being, while wealth measures stocks of natural and social capitalcarried into the future. Thinking of future society in an economic framework which putspeople and nature first, will lead to sustainable scenarios for the world. Sustainabilityand new economics are complementary concepts and mutually reinforcing.

To effect the needed transformations to implement a new economic structure based onsustainability and not growth is an immense and difficult task. However, it is important tonote that although it is desirable to move the whole world along this path, it is unrealisticto imagine that this will happen all at once or that it will happen in the same fashion indifferent regions of our planet. To move mankind towards a sustainable future, it ismuch more urgent to stop growth fueled by consumption in the developed world than inthe developing world. In addition, it is much more likely that the changes needed tomove our planet towards a sustainable future will be made first in a few countries orregions where these ideas will find more fertile ground. In my view, in this respect, LatinAmerica has a great potential to play an exemplar role, because as a region it is still notas beholden to a market economy based on consumerism as other parts of the worldare. Will the new economy be forged first in this continent? I do not know, but I hopethat this will be

the case.

A Cybernetic Approach to Economics

byRobert Hoffman, Club of Rome andwhatIf? Technologies

Since the meltdown of the global financial system in 2008 triggered by the sub-prime

mortgage

bubble in the United States, there is an emerging consensus, even among

economists, that there is a need for new economic thinking. The economic thinking thathas prevailed in postwar capitalist

societies is based on the neo-classical–

Keynesiansynthesis, hereafter mainstream

economics.

Judged from within its own frame of reference, mainstream economics has been

enormously successful. Over the postwar years in North America and Europe,

economic growth measured in terms of GDP, has been sufficient to deliver increased

prosperity and to maintain near full employment.

However, judged from outside of its own frame of reference, it is clear that

mainstream economics has failed to address the following issues:



Impending ecological limits exemplified by peak

oil and climate change;



The conflict between the goals of economic growth and sustainability;



The inadequacy GDP per capita as an indicator of social well-being or

Prosperity;



The instabilities associated with financial bubbles; and



The growing inequity

in the distribution of income both within and between

Nations.

New economic thinking must be capable of addressing all the issues above. Further, it

is recognized that all five issues are interrelated. Actions taken to resolve one issue

often

have the consequence of aggravating other issues.

Why has mainstream economics been unable to address these issues?

The neo-classical–

Keynesian synthesis frames economics as a constrained global

optimization problem: maximize utility subject to the availability of labor and capital.

Consumers and producers are utility and profit maximizers respectively. Production is

the value added to freely available natural resources by the use of scarce labor and

capital. This is the worldview articulated by PaulSamuelson in hisFoundations

(Samuelson, 1947). For this formulation to be valid, the following three conditions

must be met.



Individual consumer utility functions must be separable and convex, therefore

additive, giving rise to downward sloping demand curves.



The cost curves of individual producers must be U-shaped giving rise to

upward sloping supply curves or supply curves that have the property

increasing marginal costs.



The economy is not constrained by the availability of sources and sinks for

materials and energy.

In this formulation, supply and demand curves intersect to provide market-clearing

The inadequacy GDP per capita as an indicator of social well-being or prosperity



The instabilities associated with financial bubbles



The growing inequityin the distribution of income both within and betweennations

It is proposed that economics is more appropriately framed as a ‘management of thecommons’ problem rather than a global optimizing problem. This proposed formulationis concerned with the allocation of the benefits to be derived from a finite and diversenatural resource base distributed unevenly in space base to the population to besupported by it. The amount of benefit to be derived from the commons depends uponthe existence and effectiveness of the processes needed to transform the naturalresource of the commons into goods capable of yielding the services needed by people.Production in this framing of economics consists of the transformation of materials usingenergy and know-how.

Framing economics as a management of the commons problem implies that economicsmust be seen through the lens of complex evolutionary systems: Evolutionary, becauseevolution at both the biologic and social levels is a process in which knowledge creationplaysa key role. Complex, because there are multiple commons at variousgeographical scales consisting of a wide range of naturally occurring processes yieldingresources with differing physical properties with the consequence that there is anequally large number of processes and process chains for transforming materials andenergy. Further there are a large number of economic agents that own, control andinfluence the commons. Complexity also arises because of potential non-linearities inthe relationships among the variables.

Unlike global optimizing problems, which have elegant mathematical properties andlend themselves to analytic solutions, complex systems may be best understood usingsimulation techniques.The development of such a simulation model isthe subject ofproposed project.

Project objectives



Design and implement a simulation model as proof-of-concept for the cyberneticapproach to economics.



Create and document a set of scenarios designed to illustrate important featuresof the model as they may apply to the global issues identified by and of concernto the Club of Rome.



Make the model and the scenarios accessible to key institutions concerned withglobal issues and the formulation of public policy.



Complete this project one year from start-up.

Project Ingredients

1.

Institutional base

The proposed project needs an institutional home in an established centre in thefield of complex systems modeling. The centre

should be able to providemanagerial leadership, financial accountability and administrative support for theproject. It should be eligible for funding from academic sources and foundations.It is important that the institution be part of a network of institutions that haveprograms in the area of complexity science and new approaches to economicthinking. The complex systems modeling program proposed at the WaterlooInstitute for Complexity and Innovation (WICI) would be well placed given thelinkage between the Institute for New Economic Thinking (INET) and the Centrefor International Governance Innovation (CIGI) at the University of Waterloo.Other institutions with capabilities and interests might include the Santa FeInstitute, IIASA, Potsdam Institute, and Wuppertal Institute.

2.

Team of experts

for model and scenario design and oversight.

This team will meet two or three times over the course of the project, initially toguide the design of the model, then to critique the model once a first version has

been implemented and finally to guide the creation of a number of scenarios.This team should consist of a dozen of the best and most creative thinkers in thefield, not restricted to those within the discipline of economics. Thomas Homer-Dixon (Waterloo), Stuart Umpleby (GWU), Roger Bradbury (ANU), and MartinLees (CoR) had agreed to participate in the project as it was proposed in the firstround of INET grants. Other members might be drawn from the Club of Rome,the Santa Fe Institute, INET, the Capital

Institute, or the community of ecologicaleconomists.

3.

Implementation team

The team at whatIf? Technologies, now consisting of half a dozen experiencedmodelers with backgrounds in mathematics, computer science, physics,engineering and economics could realize the proposed model. Over the past twodecades, this team has created in excess of fifty simulation models and apowerful suite of software tools and methods for designing, implementing,calibrating and operating simulation models. This experience includes a numberof biophysical models including the Australian Stocks and flows Frameworkdeveloped in collaboration with CSIRO Sustainable Ecosystems, the CanadianEnergy Systems Simulator, developed in collaboration with Natural ResourcesCanada, the National Research Council, the Canadian Energy Research Instituteand the Institute for Sustainable Energy, Environment and Economy at theUniversity of Calgary, and the global systems simulator, a model that serves asproof-of-concept for some of the elements

of the proposed model.

4.

Funding

A ball park estimate of funding requirements for the project is $500,000. Thisestimate allows $150,000 for an honorarium and travel expenses for the expertteam members, $200,000 for the implementation team, and $150,000. forinstitutional overhead.